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The real estate industry is heading for an unprecedented crisis. The sector has already had to go through many difficult phases, but the crash potential is now many times greater.
Real estate loans affordable to almost everyone over the past 10 years have driven home prices to unprecedented heights. High single-digit or even double-digit returns could be achieved annually during this period, especially in metropolitan areas.
But the rise in inflation and the associated tightening of monetary policy by the ECB, Fed & Co are putting an abrupt end to this trend. Around the world, real estate prices are collapsing, and where the biggest bubbles had emerged, things are now going downhill the steepest.
In Europe, real property prices in the fourth quarter fell nowhere as sharply as in Sweden (-13.7%) and Germany (-12.1%) compared with the previous year. Internationally, only New Zealand (-16.5%) and Hong Kong (-15.1%) saw prices slump more sharply, data from the Bank for International Settlements show. For the first time in 12 years, real estate prices fell worldwide.
This negative trend is likely to continue as long as central banks keep interest rates high to fight inflation.
The German Ifo Institute confirms the downward trend with its latest forecast for new residential construction. After 295,300 apartments were completed last year, the number will fall to 200,000 by 2025. This is directly attributable to demand falling due to high costs.
And where demand collapses, so do prices. At the same time, the supply of properties for sale is increasing because fewer and fewer people can afford the expensive follow-up financing.
The construction industry and also banks will be equally affected by this development. The latter because loan default rates are rising and the collateral deposited on balance sheets will have to be adjusted due to falling property valuations. This is a clear harbinger of a recession ahead, as the economy will run out of money for investment. Raising money is becoming more and more expensive and credit institutions are lending less to meet the real estate risk on their balance sheets.
How the German government will manage to meet its target of 400,000 homes a year under these circumstances remains a mystery. Chancellor Olaf Scholz said last month:
“Even though times are very stormy right now as far as this target is concerned, we are not backing away from it, not even in view of the rise in interest rates.”
In the USA, the impending collapse is already becoming apparent. Investors bought 48.6 percent fewer properties in the first quarter of 2023 compared with the same quarter of the previous year. During the same period, 30-year mortgage rates rose from 3.2 percent to more than 7.0 percent. According to Goldman Sachs (NYSE:GS), that’s not going to change anytime soon, as its forecast for 2024 is for a mortgage rate of 5.9 percent. A level that is unattractive to investors as prices continue to fall.
To prevent the real estate market from unleashing another financial crisis as it did in 2007, the U.S. Federal Housing Administration floated a proposal that banks be allowed to take amounts owed on unpaid loans from a federal fund. In addition, borrowers would be allowed to reduce monthly mortgage payments for up to five years.
Meanwhile, in San Francisco, the situation continues to worsen. Just a week after Park Hotels & Resorts (NYSE:PK) stopped making payments on the $725 million loan for the Hilton San Francisco Union Square (NYSE:SQ) and Parc 55, the city’s largest shopping mall announced it could no longer service the $558 million loan.
The situation is similar in New York, the city of high-rise office buildings. The city’s comptroller, Brad Lander, has inevitably had to look at what the impact of the collapse of the commercial real estate market will be. The doomsday scenario he drafted predicts a 40 percent downturn in that sector. The associated loss of city income would increase year by year, reaching $1.2 billion by 2027.
But where there are no more office workers, the local economy also lacks customers, resulting in the closure of restaurants, bars, nail salons, etc.
The examples shown are by no means isolated cases, but are representative of a systematically widespread problem worldwide. No one hears about the numerous small real estate bankruptcies that are already taking place, because these are insignificant for good headlines.
What is worrisome is that the market shakeout triggered by high interest rates has just begun.
The insane thing is that the trigger for these dislocations is high interest rates. Interest rates that had to be tightened because of high inflation – inflation that only became a problem because of the far too long period of low interest rates.
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Values for office, retail, and apartment buildings are already down -11%.
Morgan Stanley thinks values could crash -40% when all is said and done. Big problem for the US and European Economy.
🏦🇺🇸 Morgan Stanley thinks that US commercial real estate (CRE) delinquencies will surge after a 30% decline in office property values; almost $1.5trn of US CRE debt comes due before the end of 2025. This could easily cause a serious banking crisis, with the epicentre in regional banks (see chart, above, showing the concentration of CRE in regional banks). However, as we have said many times, it would also cause problems for cities, given their revenue reliance on real estate and commercial taxes (see table, below, showing NYC revenue breakdown).
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Born in a deadly combination of the consequences of the moronic sanctions against Russia , the exploding energy costs abused as leverage of the eco-religion and the multiplied interest rates thought as a fight against mega-inflation, the tsunami of the deepest crisis since the Great War 80 years ago is now hitting land and overrunning the centers of European Green Madness.
The first sector to be fully hit by the catastrophe is the construction industry and the real estate market in Germany and Austria.
The effects are so drastic that one can rightly speak of a COLLAPS – all other terms describe the collapse only inadequately.
Residential construction in the two countries has come to a de facto standstill, and real estate transactions have fallen by more than THREE FOURTEEN – at all levels.
Private developers and the entire real estate brokerage industry are reporting sales declines of up to 90 percent (!) compared to 2022 figures – the entire industry is facing extinction. Those with high fixed costs, high loans with banks and projects financed with them just completed or even in the planning phase will not survive the year 23.
So what – the vultures celebrated for years a party and casht large – the sympathy of most humans holds itself with this special industry usually in borders. But this indifference or even open “Schadenfreude” is too short thought – because in reality by the – in the last 80 years unique – collapse of the market much more industries are affected.
Since many fellow humans are optical learners – here once an incomplete listing of the occupations, which are directly affected by the collapse.
Financing specialists Architects Office workers Soil surveyors Laboratory for soil findings Surveyor Planning offices Technical draftsmen Structural engineer Fire protection specialists Sound insulation specialists Earth moving companies – excavation specialists Formwork specialists Earth moving companies Concrete formwork specialists Concrete producers Brick manufacturers Precast concrete or wood producers Raw material traders Transport companies for precast elements Construction companies for building construction Test engineers/local building inspection Safety inspectors Metal construction Wood construction Roofers/plumbers Locksmith Building material trade Plumbers Electricians Drywallers Sheetrock producers Facade vein Painters Floor layer Tiler Building material dealers Subcontractors and transport Sanitary suppliers Fire protection technology Horticulture Exterior specialists Real estate agents Advertising designers Marketing platforms Financing specialists/ bank employees for private and commercial customers Lawyers Notaries Kitchen studios and electronics retailers Furniture retail/ Furniture stores Forwarding agents
I think – it is clear what I am getting at.
The effects are so drastic that one can rightly speak of a COLLAPS – all other terms only inadequately describe the slump.
Residential construction in the two countries has come to a de facto standstill, real estate transactions have fallen by more than THREE FOURTEEN – at all levels.
Private developers and the entire real estate brokerage industry are reporting sales declines of up to 90 percent (!) compared to 2022 figures – the entire industry is facing extinction. Those with high fixed costs, high loans with banks and projects financed with them just completed or even in the planning phase will not survive the year 23.
The full inns and tent festivals , the reports of the travel agencies about fully booked vacation destinations or the numerous walkers in the shopping streets and shopping malls during the sour weather of this year – the traffic jams in the short vacations or the stock markets artificially pushed up by money pressure – all this is only a facade anymore.
The crisis has long since spread beyond the socially and financially weaker sections of the population. The Great Crisis is here – for all of us. Literally.
And as I anticipate what will be the most frequent question in the comments What we can do ?
New elections Change course by 180 degrees Reversal of the insane measures to increase the price of energy
government price limits on energy costs – keyword basic energy supply Interest support for housing creation Deregulation and thinning out of building regulations common sense in lending regulations
Withdrawal of all measures in the Green Deal that directly affect the private sector – thus safeguarding the national wealth.
Sincerely yours
Bernd Pulch
PS: This disaster is also the disaster of a corrupt media system in this countries especially the so called expert media (Fachmedien). They tell fairy tales to their readers because it is easier to be corrupt and get ads then to write the truth and to risk profits. But that is propaganda and not journalism.
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